Item 3 Capital Increase

Proposal by the Board of Directors:
Mandatory Convertible Notes
Creation of Conditional Capital
Approval of Article 4a para. 3 of the Articles of Association

A. Motion of the Board of Directors
The Board of Directors proposes the creation of conditional capital in a maximum amount of CHF 27,775,000 by means of the following addition to the Articles of Association.

Article 4a para. 3 (new)
Mandatory Convertible Notes
The share capital will be increased by a maximum of CHF 27,775,000 through the issuance of a maximum of 277,750,000 fully paid registered shares with a par value of CHF 0.10 each upon voluntary or mandatory conversion of the 9% mandatory convertible notes due 2010 ("MCN") to be issued by the Corporation or one of its subsidiaries to one or several long-term financial investors. The conditions of the conversion rights under the MCN shall be determined by the Board of Directors. The advance subscription right and the pre-emptive right of the shareholders shall be excluded in connection with the issuance of the MCN and upon voluntary or mandatory conversion of the MCN in favor of the MCN holders. The issue price of the registered shares to be issued upon voluntary or mandatory conversion of the MCN will be determined by reference to the respective market price of the registered shares at the time of (i) the public announcement of the MCN, (ii) the shareholders' approval of this Article 4a para. 3, and (iii) the conversion of the MCN. The voluntary or mandatory conversion of the MCN is to occur within a period of two years after the issuance of the MCN. The acquisition of shares upon voluntary or mandatory conversion of the MCN as well as any subsequent transfer of the shares are subject to the registration requirements set out in Article 5 of these Articles of Association.

B. Explanations
The Board of Directors intends to issue mandatory convertible notes (MCN) in the amount of CHF 13 billion to two long-term financial investors. These investors have agreed to subscribe for CHF 11 billion and CHF 2 billion, respectively. The notes mature at the latest in two years (expected 5 March 2010). Through the lifetime of the MCN, the holders of the notes will receive an annual coupon of 9% of the nominal value of the notes, but no dividends on the underlying shares.

Existing shareholders will not be granted advance subscription rights. This statutory right may be excluded for valid reasons. The Board of Directors, when proposing that the advance subscription right of the shareholders is excluded, has to determine whether the exclusion of advance subscription rights is in the best interest of the company and whether it is necessary to achieve the desired aim. Considering the recent substantial write-downs and their impact on the capital position of UBS AG, and given the current situation of the financial markets, the Board of Directors concluded that an immediate strengthening of the capital base of the company was the overriding objective which needed to be achieved immediately. This objective could only be realized if investors could commit new capital immediately and on a firm basis. The Board of Directors therefore concluded that an issuance of MCNs at the exclusion of advance subscription rights of existing shareholders was justified under the circumstances. Other alternatives, most notably a rights offering, would not have led to the same certainty in funding of UBS AG and would not, therefore, have had the desired effect of strengthening the UBS AG capital base immediately.

As explained in some detail in the Shareholder Information Brochure dated 31 January 2008 under the heading "Mandatory Convertible Notes", the minimum number of UBS shares to be delivered upon conversion of the MCN is expected to be 176.6 million, and the maximum number is expected to be 252.5 million. However, if dilutive events (such as capital increases at a discount and dividends in cash or in specie above CHF 2.20 in 2008 or 2009) occur prior to conversion, the conversion price(s) will be adjusted, which will increase the maximum number of shares. Therefore, UBS proposes to its shareholders to approve the creation of conditional capital in the amount of 277.75 million shares; the higher number of shares is designed to provide headroom should dilutive events occur prior to conversion.

For further information, in particular as to the exclusion of the advance subscription rights, the terms and conditions of the MCN and the number of shares to be issued upon conversion, please refer to Letter to Shareholders dated 10 January 2008 and to the Shareholder Information Brochure dated 31 January 2008 under the heading "Mandatory Convertible Notes".

Alternative Proposal by Profond:
Ordinary Capital Increase
Rights Offering


C. Motion of Profond
Profond proposes that as an alternative to the creation of conditional capital for the purpose of issuing the MCN, UBS AG shall effect an ordinary capital increase with subscription rights allotted to existing shareholders (rights offering). The rights offering should be structured in a manner that also results in proceeds in the amount of CHF 13 billion. The proposal of Profond would lead to an ordinary capital increase with the following parameters:

1. Increase of the share capital from the current CHF 207,225,328.60 by a maximum amount of CHF 52,000,000 to a maximum of CHF 259,225,328.60 through the issuance of a maximum of 520,000,000 fully paid registered shares with a par value of CHF 0.10 each at an issue price of CHF 0.10. The final number of shares to be issued will be determined by the Board of Directors shortly before the launch of the rights offering and will be set at a number that results in net proceeds to UBS AG of approx. CHF 13 billion.

2. The Board of Directors is authorized to determine the subscription price. The new shares to be issued shall be entitled to dividends from the financial year 2008.

3. The contributions for the new shares to be issued shall be effected in cash.

4. The new shares shall have no preferential rights.

5. The new shares to be issued are subject to the registration requirements set out in Article 5 of the Articles of Association.

6. The subscription rights of the current shareholders shall be granted directly or indirectly. Shares in respect of unexercised subscription rights are to be sold at market conditions.

7. The Board of Directors shall effect the capital increase and file for its registration with the Commercial Register within three months from the shareholders' meeting.

Profond has submitted its motion as an alternative to the proposal of the Board of Directors referred to in agenda item 3.A above. If the original proposal of the Board of Directors to create conditional capital underlying the MCN is approved by the shareholders, the alternative proposal submitted by Profond will not be voted upon since the two proposals exclude each other, i.e., it is not possible to have both proposals approved.

The Board of Directors proposes to reject the proposal of Profond for the reasons set out below.

Prior to announcing the capital improvement measures on 10 December 2007, the Board of Directors considered but ultimately did not pursue the option of a rights offering. A rights offering would not have created the certainty of an immediate commitment of fresh capital. In addition, a rights offering features a number of disadvantages compared to the issuance of the MCN:

  • A rights offering is likely to be unsuccessful if the market price of the offered shares falls below the subscription price. For this reason, rights offerings are generally conducted at a discount to current market prices.

  • A rights offering will need to be fully underwritten by a syndicate of banks or otherwise guaranteed by a third party. If the rights offering is not underwritten, there is no certainty whether any new capital can be raised at all, and how much can be raised.

  • Given the discount required in connection with a rights offering in the current market environment, UBS may have to offer up to 520 million shares to achieve net proceeds of CHF 13 billion. This number is substantially higher than the number of shares required for the issuance of the proposed MCN (up to 277.75 million shares) yielding the same amount of proceeds. For shareholders who do not take up their rights, this means a substantial dilution.

  • A rights offering would have to be structured as a public offering in several jurisdictions to allow as many shareholders as possible to participate in the offering. In this connection, UBS AG needs to prepare a prospectus and have the same approved by the competent regulatory authorities in Switzerland and the European Union (in addition to filings in the United States of America). The time required to prepare and seek approval for a rights offering will significantly delay the issuance of new shares and the closing of the capital improvement measures planned by UBS. It would hardly be possible to close the rights offering within the statutory timeframe of three months.

  • The statutory timeframe of three months also does not provide enough flexibility in case of unforeseen events or market disruptions.

  • The announcement of a rights offering of this size would cause downward pressure on our share price, and thus would increase the uncertainty both as to the success of and the proceeds expected from a rights offering.

The Board of Directors, therefore, determined that the issuance of an MCN to two long-term financial investors was in the best interests of UBS and its shareholders, and preferable to any other option. Further explanations can be found in the Shareholder Information Brochure dated 31 January 2008 under the heading "Mandatory Convertible Notes".